Volcker Says Weakening the Fed’s Stimulus ‘Liquor’ a Challenge

Former Federal Reserve Chairman Paul Volcker said U.S. central bank officials may find it difficult to rein in their historic stimulus at the appropriate time because “there is a lot of liquor out there now.”

“At some point when the worm turns and the party is getting under way, to use that old analogy, at what point do you begin retreating?” Volcker said today in a forum discussion in Washington. “You can make a mistake and go too quick, but the much more frequent mistake in my judgment is you go too slow, because it’s never popular to take the so-called punch bowl away or to weaken the liquor.”

“There’s a lot of liquor out there now,” he said during the National Association for Business Economics annual policy conference today.

Fed officials have expanded the central bank’s balance sheet to a near-record $3.09 trillion by purchasing assets in an effort to stimulate economic growth and reduce an unemployment rate at 7.9 percent. The actions have raised concerns the Fed may risk contributing to financial instability.

Earlier in the day, Fed Vice Chairman Janet Yellen told the conference attendees that while “the potential costs” of asset purchases “definitely need to be monitored over time,” she did “not see any that would cause me to advocate a curtailment.”

Risk Balance

“I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment,” Yellen said. The Fed should press on with $85 billion in monthly bond buying, she said.

Volcker said the current policies Fed officials’ put in place are “OK at the moment” because there’s “no inflationary problem at the moment, and they want to support growth.”

Wrapping up the stimulus will be “mechanically” possible, Volcker said. Doing it at the “crucial time, in a delicate way that can be done without creating expectations in the other direction that will be harmful” is the difficult part, he said.

“It’s not impossible, but it’s a real challenge,” said Volcker, 85. He spoke at the event after receiving NABE’s first lifetime achievement award for economic policy.

The Federal Open Market Committee in January affirmed its plan to continue buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.

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